Tag Archives: cost reduction

Egads! Is it truly possible? Has the increase in health care costs been at its lowest in almost four decades? And this in spite of the Baby Boomer generation fast approaching retirement age? What could account for such a phenomenon and is it sustainable? All relevant questions that have health care experts scratching their heads in search of answers and have politicians scrambling to enact programs to further the slow down in the increase in health care costs. But, perhaps inaction at this time is the appropriate response. Can we afford to have the fractured political process impede the progress that has been achieved? Eduardo Porter, in an article in his Economic Scene column in the New York Times, opines on his take on the subject. The article is shown below. I thought this would be of interest to you. Comments, please.

Economic Scene

Medicare Needs Fixing, but Not Right Now

By EDUARDO PORTER

What’s the rush? For all the white-knuckled wrangling over spending cuts set to start on Friday, the fundamental partisan argument over how to fix the government’s finances is not about the immediate future. It is about the much longer term: how will the nation pay for the care of older Americans as the vast baby boom generation retires? Will the government keep Medicare spending in check by asking older Americans to shoulder more costs? Should we raise taxes instead?

Experiments by health care providers on cheaper and more efficient ways to deliver care appear to be helping push costs down.

It might not be a good idea to try to resolve these questions quite so urgently. Partisan bickering under the threat of automatic budget cuts is unlikely to produce a calm, thoughtful deal.

“We don’t have to solve this tomorrow; not even next year,” said Jonathan Gruber, an economist at the Massachusetts Institute of Technology who worked on the design of President Obama’s health care reform.

More significantly perhaps, some economists point out that the problem may already be on the way toward largely fixing itself. The budget-busting rise in health care costs, it seems, is finally losing speed. While it would be foolhardy to assume that this alone will stabilize government’s finances, the slowdown offers hope that the challenge may not be as daunting as the frenzied declarations from Washington make it seem.

Medicare spending is growing faster — stretched by baby boomers stepping out of the work force and into retirement. But its pace has slowed markedly, too. Earlier this month, the Congressional Budget Office said that by 2020 Medicare spending would be $126 billion less than it predicted three years ago. Spending over the coming decade, it added, would be $143 billion less than it forecast just last August.

While economists acknowledge that the recession accounts for part of the decline, depressing incomes and consumption, something else also seems to be going on: insurers, doctors, hospitals and other providers are experimenting with new, cheaper and more efficient ways to deliver care.

Prodded by President Obama’s Affordable Care Act, which offers providers a share of savings reaped by Medicare from any efficiency gains, many doctors are dropping the costly practice of charging a fee for each service regardless of its contribution to patients’ health. Doctors are joining hundreds of so-called Accountable Care Organizations, which are paid to maintain patients in good health and are thus encouraged to seek the most effective treatments at the lowest possible cost.

This has kindled hope among some scholars that Medicare could achieve the needed savings just by cleaning out the health care system’s waste.

Elliott Fisher, who directs Dartmouth’s Atlas of Health Care, which tracks disparities in medical practices and outcomes across the country, pointed out that Medicare spending per person varies widely regardless of quality — from $7,734 a year in Minneapolis to $11,646 in Chicago — even after correcting for the different age, sex and race profiles of their populations.

He noted that if hospital stays by Medicare enrollees across the country fell to the length prevailing in Oregon and Washington, hospital use — one of the biggest drivers of costs — would fall by almost a third.

“Twenty to 30 percent of Medicare spending is pure waste,” Dr. Fisher argues. “The challenge of getting those savings is nontrivial. But those kinds of savings are not out of the question.”

We could be disappointed, of course. Similar breakthroughs before have quickly fizzled. Just think back to that brief spell in the mid-1990s when health maintenance organizations seemed to beat health care inflation — until patients rebelled against being denied services and doctors dropped out of their networks rather than accept lower fees.

The Centers for Medicare and Medicaid Services already expects spending to rebound in coming years. Without tougher cost control devices, be it vouchers to limit government spending or direct government rationing, counting on savings of the scale needed to overcome the expected increase in Medicare rolls may be hoping for pie in the sky.

“It makes no sense,” said Eugene Steuerle, an economist at the Urban Institute, to expect the government will reap vast Medicare savings without having an impact on the quality of care.

The Affordable Care Act already contemplates fairly big cuts to Medicare. In its latest long-term projections published last year, the Congressional Budget Office estimated that under current law, growth in spending per beneficiary over the coming decade would be about half a percentage point slower than the rate of economic growth per person.

To understand how ambitious this is, consider that Medicare spending per beneficiary since 1985 has exceeded the growth of gross domestic product per person by about 1.5 percentage points per year. Slowing down that spending would require deep cuts in doctor reimbursements that, though written into law, Congress has never allowed to happen — repeatedly voting to cancel or postpone them.

Under a more realistic situation, the Budget Office projected that the growth of Medicare spending per capita over the next 10 years would be in fact 0.6 percentage points higher than under current law and accelerate further after that.

Yet despite the ambition of these targets, they would not be enough to stabilize future Medicare spending as a share of the economy. A report by three health care policy experts, Michael Chernew and Richard Frank of Harvard Medical School, together with Stephen Parente of the University of Minnesota, concluded that to do that would require limiting the growth of spending per beneficiary at 1.25 percentage points less than the growth of our gross domestic product per person.

“The Affordable Care Act places Medicare spending on a trajectory that is historically low,” Mr. Chernew said, noting his opinion was not an official statement as vice chairman of Medicare’s Payment Advisory Commission, which advises Congress on Medicare. “Could we do better? Of course. Will we? That requires a little more skepticism.”

Yet even if it is unrealistic to expect that newfound efficiencies will stabilize Medicare’s finances, the slowdown in health care spending suggests that politicians in Washington calm down. It offers, at the very least, more breathing room to carefully consider reforms to the system to raise revenue or trim benefits in the least damaging way.

There are many ideas out there — from changing Medicare’s premiums, deductibles and coinsurance to introducing a tax on carbon emissions to raise revenue. Some of them are not as good as others. Until recently, President Obama favored increasing the eligibility age for Medicare. Then research by the Kaiser Family Foundation concluded that raising the age would increase insurance premiums and cost businesses, beneficiaries and states more than the federal government would save. The nation would lose money in the deal.

“As we do this, there are smarter and dumber ways to do it,” Mr. Gruber said. “It would be a problem if we were to do things in a panic mode that set us backward.”

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public Service of New York University. He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.

The debate continues: can a social service such as health care operate in a profit-generating mode? Undoubtedly, there are fierce opinions on both the pro and con aspects of this question. Those who support the notion that health care can operate as for-profit entities point out that the financial difficulties encountered by not-for-profit health care providers. Their mantra is “No Margin, No Mission”; the patient population will receive fewer, or no, services if health care companies are not managed in financially responsible and profitable ways. On the other hand, those who favor the realm of the non-profit universe contend that the quality of care is compromised and patients not receiving care because of the emphasis in the profit mentality. So, who’s correct? It’s a difficult conundrum to address.

An article in the January 8, 2013 edition of the New York Times focused on this issue. The article appears below:

Health Care and Profits, a Poor Mix

Published: January 8, 2013

Thirty years ago, Bonnie Svarstad and Chester Bond of the School of Pharmacy at the University of Wisconsin-Madison discovered an interesting pattern in the use of sedatives at nursing homes in the south of the state.

Patients entering church-affiliated nonprofit homes were prescribed drugs roughly as often as those entering profit-making “proprietary” institutions. But patients in proprietary homes received, on average, more than four times the dose of patients at nonprofits.

Writing about his colleagues’ research in his 1988 book “The Nonprofit Economy,” the economist Burton Weisbrod provided a straightforward explanation: “differences in the pursuit of profit.” Sedatives are cheap, Mr. Weisbrod noted. “Less expensive than, say, giving special attention to more active patients who need to be kept busy.”

A shareholder might even applaud the creativity with which profit-seeking institutions go about seeking profit. But the consequences of this pursuit might not be so great for other stakeholders in the system — patients, for instance. One study found that patients’ mortality rates spiked when nonprofit hospitals switched to become profit-making, and their staff levels declined.

These profit-maximizing tactics point to a troubling conflict of interest that goes beyond the private delivery of health care. They raise a broader, more important question: How much should we rely on the private sector to satisfy broad social needs?

From health to pensions to education, the United States relies on private enterprise more than pretty much every other advanced, industrial nation to provide essential social services. The government pays Medicare Advantage plans to deliver health care to aging Americans. It provides a tax break to encourage employers to cover workers under 65.

Businesses devote almost 6 percent of the nation’s economic output to pay for health insurance for their employees. This amounts to nine times similar private spending on health benefits across the Organization for Economic Cooperation and Development, on average. Private plans cover more than a third of pension benefits. The average for 30 countries in the O.E.C.D. is just over one-fifth.

We let the private sector handle tasks other countries would never dream of moving outside the government’s purview. Consider bail bondsmen and their rugged sidekicks, the bounty hunters.

Our reliance on private enterprise to provide the most essential services stems, in part, from a more narrow understanding of our collective responsibility to provide social goods. Private American health care has stood out for decades among industrial nations, where public universal coverage has long been considered a right of citizenship. But our faith in private solutions also draws on an ingrained belief that big government serves too many disparate objectives and must cater to too many conflicting interests to deliver services fairly and effectively.

Our trust appears undeserved, however. Our track record suggests that handing over responsibility for social goals to private enterprise is providing us with social goods of lower quality, distributed more inequitably and at a higher cost than if government delivered or paid for them directly.

The government’s most expensive housing support program — it will cost about $140 billion this year — is a tax break for individuals to buy homes on the private market.

According to the Tax Policy Center, this break will benefit only 20 percent of mostly well-to-do taxpayers, and most economists agree that it does nothing to further its purported goal of increasing homeownership. Tax breaks for private pensions also mostly benefit the wealthy. And 401(k) plans are riskier and costlier to administer than Social Security.

From the high administrative costs incurred by health insurers to screen out sick patients to the array of expensive treatments prescribed by doctors who earn more money for every treatment they provide, our private health care industry provides perhaps the clearest illustration of how the profit motive can send incentives astray.

By many objective measures, the mostly private American system delivers worse value for money than every other in the developed world. We spend nearly 18 percent of the nation’s economic output on health care and still manage to leave tens of millions of Americans without adequate access to care.

Britain gets universal coverage for 10 percent of gross domestic product. Germany and France for 12 percent. What’s more, our free market for health services produces no better health than the public health care systems in other advanced nations. On some measures — infant mortality, for instance — it does much worse.

In a way, private delivery of health care misleads Americans about the financial burdens they must bear to lead an adequate existence. If they were to consider the additional private spending on health care as a form of tax — an indispensable cost to live a healthy life — the nation’s tax bill would rise to about 31 percent from 25 percent of the nation’s G.D.P. — much closer to the 34 percent average across the O.E.C.D.

A quarter of a century ago, a belief swept across America that we could reduce the ballooning costs of the government’s health care entitlements just by handing over their management to the private sector. Private companies would have a strong incentive to identify and wipe out wasteful treatment. They could encourage healthy lifestyles among beneficiaries, lowering use of costly care. Competition for government contracts would keep the overall price down.

We now know this didn’t work as advertised. Competition wasn’t as robust as hoped. Health maintenance organizations didn’t keep costs in check, and they spent heavily on administration and screening to enroll only the healthiest, most profitable beneficiaries.

Today, again, entitlements are at the center of the national debate. Our elected officials are consumed by slashing a budget deficit that is expected to balloon over coming decades. With both Democrats and Republicans unwilling to raise taxes on the middle class, the discussion is quickly boiling down to how deeply entitlements must be cut.

We may want to broaden the debate. The relevant question is how best we can serve our social needs at the lowest possible cost. One answer is that we have a lot of room to do better. Improving the delivery of social services like health care and pensions may be possible without increasing the burden on American families, simply by removing the profit motive from the equation.

Granted this is one person’s view of the matter. What are your thoughts? In my course, “The Business of Health Care”, this issue is a key component of the subject matter. Care to learn more and hear both points of view? Register for the class. I look forward to meeting you.

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public Service of New York University. He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.

The discussions continue about the ways that waste and overspending can be restrained in our domestic health care system. With health care expenditures soon to approach 20% of the GDP, the matter is increasingly more important. Recent studies and policy papers have addressed this issue.

With the Institute of Medicine concluding that the U.S. healthcare industry wastes about $750 billion a year, hospitals need to understand the types and levels of waste, as well as the barriers to eliminating it.

The industry also needs standardized forms and procedures to get rid of complex and time-consuming billing work for providers. In fact, about 30 percent of every healthcare dollar goes toward paperwork and administrative tasks, Forbesreported.

However, the policy brief noted, eliminating waste in healthcare gets even more complicated with fears that cost-curbing efforts will jeopardize or ration patient care.

The policy brief follows:

A third or more of what the US spends annually may be wasteful. How much could be pared back–and how–is a key question.

What’s the issue?

Health care spending in the United States is widely deemed to be growing at an unsustainable rate, and policy makers increasingly seek ways to slow that growth or reduce spending overall. A key target is eliminating waste–spending that could be eliminated without harming consumers or reducing the quality of care that people receive and that, according to some estimates, may constitute one-third to nearly one-half of all US health spending.

Waste can include spending on services that lack evidence of producing better health outcomes compared to less-expensive alternatives; inefficiencies in the provision of health care goods and services; and costs incurred while treating avoidable medical injuries, such as preventable infections in hospitals. It can also include fraud and abuse, which was the topic of a Health Policy Brief published on July 31, 2012.

This policy brief focuses on types of waste in health care other than fraud and abuse, on ideas for eliminating it, and on the considerable hurdles that must be overcome to do so.

What’s the background?

Many studies have examined the characteristics and amounts of wasteful or ineffective US health care spending in public programs, such as Medicare and Medicaid, and in care paid for by private insurance as well as out-of-pocket by consumers. By most accounts, the amount of waste is enormous.

THE COST OF WASTE: By comparing health care spending by country, the McKinsey Global Institute found that, after controlling for its relative wealth, the United States spent nearly $650 billion more than did other developed countries in 2006, and that this difference was not due to the US population being sicker. This spending was fueled by factors such as growth in provider capacity for outpatient services, technological innovation, and growth in demand in response to greater availability of those services. Another $91 billion in wasteful costs or 14 percent of the total was due to inefficient and redundant health administration practices.

By looking at regional variations in Medicare spending, researchers at the Dartmouth Institute for Health Policy and Clinical Practice have estimated that 30 percent of all Medicare clinical care spending could be avoided without worsening health outcomes. This amount represents about $700 billion in savings when extrapolated to total US health care spending, according to the Congressional Budget Office.

More recently, an April 2012 study by former Centers for Medicare and Medicaid Services (CMS) administrator Donald M. Berwick and RAND Corporation analyst Andrew D. Hackbarth estimated that five categories of waste consumed $476 billion to $992 billion, or 18 percent to 37 percent of the approximately $2.6 trillion annual total of all health spending in 2011. Spending in the Medicare and Medicaid programs, including state and federal costs, contributed about one-third of this wasteful spending, or $166 billion to $304 billion (Exhibit 1). Similarly, a panel of the Institute of Medicine (IOM) estimated in a September 2012 report that $690 billion was wasted in US health care annually, not including fraud.

CATEGORIES OF WASTE: Researchers have identified a number of categories of waste in health care, including the following:

Failures of care delivery. This category includes poor execution or lack of widespread adoption of best practices, such as effective preventive care practices or patient safety best practices. Delivery failures can result in patient injuries, worse clinical outcomes, and higher costs.

A study led by University of Utah researcher David C. Classen and published in the April 2011 issue of Health Affairs found that adverse events occurred in one-third of hospital admissions. This proportion is in line with findings from a 2010 study by the Department of Health and Human Services’ Office of Inspector General (OIG), which found that Medicare patients experienced injuries because of their care in 27 percent of hospital admissions.

These injuries ranged from “temporary harm events,” such as prolonged vomiting and hypoglycemia, to more serious “adverse events,” such as kidney failure because of medication error. Projected nationally, these types of injuries–44 percent of which were found to be clearly or likely preventable–led to an estimated $4.4 billion in additional spending by Medicare in 2009, the OIG found. Berwick and Hackbarth estimate that failures of care delivery accounted for $102 billion to $154 billion in wasteful spending in 2011.

Failures of care coordination. These problems occur when patients experience care that is fragmented and disjointed–for example, when the care of patients transitioning from one care setting to another is poorly managed. These problems can include unnecessary hospital readmissions, avoidable complications, and declines in functional status, especially for the chronically ill.

Nearly one-fifth of fee-for-service Medicare beneficiaries discharged from the hospital are readmitted with 30 days; three-quarters of these readmissions–costing an estimated $12 billion annually–are in categories of diagnoses that are potentially avoidable. Failures of care coordination can increase costs by $25 billion to $45 billion annually. (See the Health Policy Brief published on September 13, 2012, for more information on improving care transitions.)

Overtreatment. This category includes care that is rooted in outmoded habits, that is driven by providers’ preferences rather than those of informed patients, that ignores scientific findings, or that is motivated by something other than provision of optimal care for a patient. Overall, the category of overtreatment added between $158 billion and $226 billion in wasteful spending in 2011, according to Berwick and Hackbarth.

An example of overtreatment is defensive medicine, in which health care providers order unnecessary tests or diagnostic procedures to guard against liability in malpractice lawsuits. A September 2010 Health Affairs study led by Harvard University researcher Michelle M. Mello estimated that in 2008, $55.6 billion or 2.4 percent of total US health care spending was attributed to medical liability system costs, including those for defensive medicine.

Overtreatment can also result from overdiagnosis, which results from efforts to identify and treat disease in its earliest stages when the disease might never actually progress and when a strategy such as watchful waiting may have been preferred. For example, in July 2012 the US Preventive Services Task Force recommended against prostate-specific antigen-based screening for prostate cancer because of “substantial overdiagnosis” of tumors, many of which are benign. Excessive treatment of these tumors, including surgery, leads to unnecessary harms, the task force said.

Overtreatment also includes intensive care at the end of a person’s life when alternative care would have been preferred by the patient and family, or excessive use of antibiotics.

Another form of overtreatment is the use of higher-priced services that have negligible or no health benefits over less-expensive alternatives. When two approaches offer identical benefits but have very different costs, the case for steering patients and providers to the less costly alternative may be clear–for example, using generics instead of brand-name drugs.

There is also provision of many services that may once have been considered good health care but that now have been discredited as lacking in evidence of benefit. Under the umbrella of the American Board of Internal Medicine Foundation’s “Choosing Wisely” initiative, nine different medical specialty groups and Consumer Reports have identified a series of regularly used tests or procedures whose use should be examined more closely. In 2013, 21 additional medical specialty groups will release similar lists in their respective fields.

The National Priorities Partnership program at the National Quality Forum, a nonprofit organization that works with providers, consumer groups, and governments to establish and build consensus for specific health care quality and efficiency measures, has produced a list of specific clinical procedures, tests, medications, and other services that may not benefit patients. The next step is for physicians and payers to change their practices accordingly.

After requesting public input, CMS on November 27, 2012, posted on its website a list of procedures or services that may be overused, misused, or provide only minimal health care benefits. They include lap-band surgery for obesity, endoscopy for gastroesophageal reflux disease, and lung volume reduction surgery. CMS said that these services may be evaluated to determine whether they should continue to be reimbursed under Medicare.

Administrative complexity. This category of waste consists of excess spending that occurs because private health insurance companies, the government, or accreditation agencies create inefficient or flawed rules and overly bureaucratic procedures. For example, a lack of standardized forms and procedures can result in needlessly complex and time-consuming billing work for physicians and their staff.

In an August 2011 Health Affairs article, University of Toronto researcher Dante Morra and coauthors compared administrative costs incurred by small physician practices in the United States, which interact with numerous insurance plans, to small physician practices in Canada, which interact with a single payer agency. US physicians, on average, incurred nearly four times more administrative costs than did their Canadian counterparts. If US physicians’ administrative costs were similar to those of Canadian physicians, the result would be $27.6 billion in savings annually. Overall, administrative complexity added $107 billion to $389 billion in wasteful spending in 2011.

Pricing failures. This type of waste occurs when the price of a service exceeds that found in a properly functioning market, which would be equal to the actual cost of production plus a reasonable profit. For example, Berwick and Hackbarth note that magnetic resonance imaging and computed tomography scans are several times more expensive in the United States than they are in other countries, attributing this to an absence of transparency and lack of competitive markets. In total, they estimate that these kinds of pricing failures added $84 billion to $178 billion in wasteful spending in 2011.

Fraud and abuse. In addition to fake medical bills and scams, this category includes the cost of additional inspections and regulations to catch wrongdoing. Berwick and Hackbarth estimate that fraud and abuse added $82 billion to $272 billion to US health care spending in 2011.

What are the issues?

Although there is general agreement about the types and level of waste in the US health care system, there are significant challenges involved in reducing it. Much waste is driven by the way US health care is organized, delivered, and paid for and, in particular, by the economic incentives in the system that favor volume over value. An additional problem is that attacking “waste” usually means targeting someone’s income.

In its September 2012 report, the IOM offered 10 broad recommendations for creating a very different health care system in which research, new incentives, partnerships between providers and patients, and a culture that supports continuous learning and development could lead to real-time improvements in the efficiency and effectiveness of US health care.

Although the IOM committee that prepared the report did not estimate cost savings, it predicted that implementing these measures would improve care and reduce expenses. The panel’s recommendations included the following:

Improve providers’ capacity to collect and use digital data to advance science and improve care.

Involve patients and their families or caregivers in care decisions. Increasing comparative effectiveness research may help physicians, patients, and their families make more informed decisions. (See the Health Policy Brief published on October 8, 2010, for more information on comparative effectiveness research.)

Use clinical practice guidelines and provider decision support tools to a greater extent.

Promote partnerships and coordination between providers and the community to improve care transitions.

Realign financial incentives to promote continuous learning and the delivery of high-quality, low-cost care. Numerous efforts are underway among public and private payers to move from the traditional fee-for-service mechanism, which pays based on the volume of services performed, and toward those that pay based on value and outcomes. (For more information, see the Health Policy Brief published October 11, 2012, on pay-for-performance, and the Health Policy Brief published January 31, 2012, on accountable care organizations.

Improve transparency in provider performance, including quality, price, cost, and outcomes information. In a May 2003 Health Affairs article, Gerard F. Anderson from Johns Hopkins University, Uwe E. Reinhardt from Princeton University, and coauthors compared US health care spending with those of other member nations of the Organization for Economic Cooperation and Development. They found that the United States spent more on health care than any other country and that the difference was caused mostly by higher prices.

One way to improve transparency and reduce prices is through “reference pricing,” in which an employer or insurer makes a defined contribution toward covering the cost of a particular service and the patient pays the remainder. The objective is to encourage patients to choose providers with both quality and costs in mind. In a September 2012 Health Affairs article, University of California, Berkeley, researchers James C. Robinson and Kimberly MacPherson reviewed how this approach is being tested.

Many of the measures described above are in process, although they are playing out at different rates in different regions and systems around the country. There are widespread concerns about how replicable and scalable some new payment models are, and how soon they will make a major difference in the way care is provided and in what amount. There are also cross-cutting trends, including consolidation of hospital systems and their employment of physicians, which could lead to the provision of more unnecessary services, not fewer.

For example, in a May 2012 Health Affairs article, Robert A. Berenson, an institute fellow at the Urban Institute, and coauthors found that dominant hospital systems and large physician groups can often exert considerable market power to obtain steep payment rates from insurers.

FEAR OF RATIONING: In theory, a focus on eliminating waste in health care could skirt the issue of rationing because wasteful activities, by definition, carry no benefit to consumers. However, there may be a fine line between health care that is of no benefit and situations where the benefits are relatively small, especially in comparison to the cost.

A common example involves continued chemotherapy treatments for patients having certain advanced cancers. These treatments can cost tens of thousands of dollars but extend a patient’s life by only a few weeks. However, restricting the use of such treatments or services can lead to accusations of “rationing.”

To address many Americans’ fear that the Affordable Care Act would lead to rationing, the law specifically forbids the federal government from making decisions on “coverage, reimbursement, or incentive programs” under Medicare that take cost-effectiveness into account, and “in a manner that treats extending the life of an elderly, disabled, or terminally ill individual as of lower value than extending the life of an individual who is younger, nondisabled, or not terminally ill.” The law is silent on any of these activities going on outside of Medicare.

What’s Next?

Efforts to extract waste from the health care system will in all likelihood continue along a range of federal government initiatives, including information technology adoption, pay-for-performance, payment and delivery reforms, comparative effectiveness research, and competitive bidding. Similar programs are also being initiated by state Medicaid agencies and by private payers. In the view of many experts, even more vigorous efforts to pursue the reduction of waste in health care are clearly warranted.

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public Service of New York University. He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.

With health care costs continuing to comprise a huge portion of the nation’s Gross Domestic Product, efforts are ever-continuing to identify the drivers of these costs and, ultimately, devise methods to slow or decrease health care expenses. A recent article in Kaiser Health News addressed seven factors that contribute to the rise in spending. I thought that this article would be of interest to you.

There is no one villain in the battle against rising health care costs. Currently, the United States spends more on health care services than any other country, exceeding $2.6 trillion, or about 18 percent of gross domestic product. Most years, medical spending rises faster than inflation and the economy as a whole. Many factors — and nearly everyone — contributes to those increases.

Here are seven ways you or your medical providers play a role, based on a recent report from the Bipartisan Policy Center, a think tank in Washington, D.C.

1. We pay our doctors, hospitals and other medical providers in ways that reward doing more, rather than being efficient.

Most insurers — including traditional Medicare — pay doctors, hospitals and other medical providers under a fee-for-service system that reimburses for each test, procedure or visit. Coupled with a medical system that is not integrated, this encourages over treatment, including repetitive tests, the report says. New efforts in the federal health law and among some private insurers aim to move payments toward a flat rate for a specific condition, such as a knee replacement, or for a patient’s entire episode of care, in order to streamline costs. Medical systems and doctors are also looking to electronic medical records as a way to improve coordination and reduce unnecessary, repeated tests.

2. We’re growing older, sicker and fatter.

As we get older, we tend to need more medical care. The baby boom generation is heading into retirement, with enrollment in Medicare set to grow by an average of 1.6 million people annually. Additionally, nearly half the U.S. population has one or more chronic conditions, among them asthma, heart disease or diabetes, which drive up costs. And two-thirds of adults are either overweight or obese, which can also lead to chronic illness and additional medical spending.

3. We want new drugs, technologies, services and procedures.

Medical advances can help us get well, avoid disease and delay death, but they also drive up spending. Much new technology comes on the market after being tested only for safety or whether the new treatment is comparable to existing ones or even placebos. Patients and doctors often demand the newest treatments, even if there is little or no evidence that they are better. Prices for newer treatments are often higher than for the products they replace.

4. We get tax breaks on buying health insurance — and the cost to patients of seeking care is often low.

The majority of people with insurance get it through their jobs. The amount employers pay toward coverage is tax deductible for the firm and tax exempt to the worker, thus encouraging more expensive health plans with richer benefits, the report says. How that coverage is designed also plays a role: Low deductibles or small office co-payments can encourage overuse of care, the report says. Increasingly, however, employers are moving toward high-deductible coverage as a way to slow premium growth and require workers to pay more toward the cost of care.

5. We don’t have enough information to make decisions on which medical care is best for us.

While medical journals, the Internet and the popular press are awash in health information and studies, professionals and patients find there is no broad standard for evaluating individual treatments, or how specific treatments compare with others. Even when evidence shows a treatment isn’t effective, or is potentially harmful, it can take a long time for that information to actually change how doctors practice or what patients demand, the report says. Additionally, Americans vary widely in how they view end-of- life issues, with some desiring every possible medical intervention to stave off death in every situation, no matter how small the possibility of success.

6. Our hospitals and other providers are increasingly gaining market share and are better able to demand higher prices.

While mergers or partnerships among medical providers or insurers may improve efficiency and help drive down prices, consolidation can also have the opposite effect, allowing near-monopolies in some markets and driving up prices, the report says. Increasingly, hospitals are buying up rivals and directly employing physicians, creating larger medical systems.

7. We have supply and demand problems, and legal issues that complicate efforts to slow spending.

Malpractice premiums and jury awards are part of what drives spending. A larger problem, although hard to quantify, is “defensive medicine” — when doctors prescribe unnecessary tests or treatment out of fear of facing a lawsuit, the report says. Fraudulent billing or unnecessary tests by medical providers seeking to “game the system” are another concern.

Finally, the report notes that state laws sometimes limit the ability of nurse practitioners or other medical professionals, who are paid less than doctors, to fully perform work for which they are trained. The U.S. faces a shortage of primary care doctors, so more advanced practice nurses and others will be needed to help care for patients who gain insurance coverage under the federal health law. Conversely, the U.S. has a higher ratio of specialists than other countries, which can serve to drive up spending. Specialists have more advanced training than primary care doctors, and are paid far more.

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public Service of New York University. He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.

In my article in the September blog, I wrote about a systemic approach to containing health care spending. I thought this article about the slowdown in health care spending would also be of interest.

Democrats on the campaign trail have warmed up to health care in recent months, touting the benefits of their mammoth 2010 law. While trumpeting popular provisions such as coverage for preexisting medical conditions, Democrats are also linking the Affordable Care Act to a recent slowdown in the rise of health care costs.

Former President Clinton delved into the subject at his convention speech in Charlotte, N.C., suggesting that President Obama’s health care law produced the slower-than-average growth in health care spending in 2010 and 2011.

“Health care spending has been under 4 percent in both years, for the first time in 50 years,” Clinton said.

Health care spending increased by just 3.9 percent in 2010 and 3.8 percent in 2009. And within Medicare, the spending slowdown has been even more dramatic: Instead of the program’s average 6 percent annual increase per beneficiary in recent years, 2010’s rate was 0.2 percent. In 2011, it was 2.8 percent. This benefits household budgets but also the government’s coffers since the longer-term costs of Medicare and other health entitlements pose huge fiscal challenges for the nation.

But economists on both sides of the political spectrum say that a variety of forces are at work in the more restrained increases in health care spending. One factor is a weak economy, which means Americans might opt to postpone elective procedures like cataract or knee surgery to avoid out-of-pocket costs that aren’t covered by insurance. Or they might skimp on costs like prescription drugs. When fewer people visit the doctor or when people cut back on prescription-drug purchases, insurance companies see lower costs and that can eventually translate into cheaper premiums for consumers.

The Kaiser Family Foundation found that the average family premium for employer-sponsored health insurance rose to nearly $16,000 a year, about a 4 percent increase from last year. The numbers might give many Americans sticker shock, but it was a smaller rise than expected. KFF President Drew Altman said that it’s too soon to tell what the cause is, exactly.

David Cutler, a Harvard economist and frequent adviser to the Obama campaign, told the New York Times this week that the Affordable Care Act’s efforts to control costs were contributing to the slowdown.

“The slow economy is only part of it,” he told The Times.

The good numbers are fodder for Democrats on the campaign trail to argue that Obama’s health care law did, in fact, slow down health care costs. The law primarily saves money by slashing $716 billion from Medicare payment rates to hospitals and private Medicare plans. Those cuts just went into effect this year, and at least on the hospital side, they are contributing to the slower-than-expected growth in Medicare spending in 2012. But those cuts were largely put in place to offset the cost of helping an additional 30 million people get insurance coverage, not to stem the rising cost of health care.

There are also several pilot programs in the Affordable Care Act that reward hospitals and doctors with federal funding if they successfully save money by using new delivery methods, most of which emphasize greater coordination between health care providers. Many of those programs just started in the past year and haven’t been operating long enough to see savings.

As far as consumers’ pocketbooks are concerned, the law also included a new rule for insurance companies that limits how much they can spend from premiums on things like advertising and salaries. That went into effect in 2011, and consumers started seeing the dividends of that rule last month: the Obama administration reports that insurance companies paid back more than $1 billion to American consumers this year.

Gail Wilensky, a former top health official in the George H.W. Bush administration, said she hoped it was true that the health care law was contributing to a lasting trend of lower health care inflation. But Wilensky said in an interview, “Whatever is going on, it’s very hard to attribute it to anything in the ACA. It was starting before that.”

Wilensky said that though the slowdown in health spending outpaces the decline in incomes tied to the recession, that calculation does not include other losses in wealth that impact how much people spend on health care.

“It was not just job loss, but in a way that has been unusual, it was wealth loss, as reflected by the decline of the stock market and, for many people, the decline in their home values. That is such a big, big part of middle-class American’s wealth position, and we underestimate if we only look at income loss,” Wilensky said.

She also pointed to a slowdown in spending that occurred in the 1990s as health-maintenance organizations restricted health services. Eventually that spending slowdown was reversed as doctors, hospitals, and patients pushed back against insurance-company restrictions.

Robert Berenson, a fellow at the liberal-leaning Urban Institute, said that the talk of health care reform in general, and not the specific policies of the Affordable Care Act in particular, could potentially be credited with the spending slowdown.

“I do think it’s more of an environmental phenomenon that the world is going to change,” Berenson said in an interview. “I think something real is going on related to all the proposals for new payment models, and physicians and others are getting the message.”

In other words, the health care industry has seen the writing on the wall: They will no longer get paid for every single test and procedure they do.

Berenson, who spent 20 years practicing as an internist, said it might be that doctors are tired of getting criticized for not paying attention to costs.

“I suspect physicians are tired being criticized for not being able to restrain themselves,” Berenson said. “It’s more health reform in general, rather than specific provisions that are associated with ACA.”

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public Service of New York University. He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.

The United States with a population of over 313 million people spends over 17% of its GDP on health expenditures while over 14% of its population lack health insurance. This has led to runaway costs, access to care issues, and in the face of recent healthcare reform efforts, worries of severe physician shortages come 2014. On the contrary, Sweden, with a much smaller, homogenous population of 9.4 million people has been able to keep health expenditures less than 10% of its GDP while covering all of its population. If efficiency of health dollars were the metric to compare health systems internationally, Sweden would lead the U.S. in this regard for the last 30 years. Despite their successes, like all developed nations, Sweden faced threats of increasing costs in the 1990’s due to an economic downturn. Additionally, Sweden also saw an aging population with a longer life expectancy from advancements in technology and modern medicine. When healthcare is government run it inevitably will succumb to rationing when tax dollars are scare. However, Sweden has been able to achieve sustainable results through policy and market reforms focused on (1) the decentralization of healthcare management, (2) cost containment measures, and (3) physician and hospital competition.

Decentralization of Healthcare Management

While Sweden is a model for a single payer system, many of their reforms can be applicable to the United Stated. In Sweden the Health and Sickness Care Law of 1982 decentralized the Swedish government’s control of healthcare to keep it “accessible, efficient, and equitable.” Counties within the country were given more autonomy to set up boards and administer health services. In turn, many of the national rules dissolved. This decentralization gave more power for regional decisions within the counties of Sweden. This is unlike America where the answer to the uninsured population in its most recent healthcare reform efforts was to use the national approach of health exchanges and essential health benefits rather than delegating the particular solutions to individual states and localities. For example the Department of Health & Human Services mandated that every state have a health benefit exchange by 2014 or the Federal government would create one within the state.

Lesson Learned: Place the burden of the uninsured into the hands of local governments to formulate strategies to address the issues that are sensitive to the local values.

For example, in the U.S. one third of the uninsured find insurance within 6 months. In Sweden, many counties pay for insurance costs for citizens up to 6 months until they find a new job. This would eliminate 15 million of the 45 million uninsured. Additionally, 50% of the uninsured work part-time. A U.S. state resolution would be a sickness fund (similar to Medicaid) that caters to individuals that work less than 40 hours a week with multiple employers, which would lower the uninsured rates to ~20 million. Lastly, 43% of the uninsured are located in only 4 states (New York, Florida, Texas and California). A focus on local initiatives to answer a national problem similar to Sweden could have potentially been a better use of resources and national funds than a Federal law impacting all 50 states.

Cost Containment

In 1984, with the passage of the Dagmar Reform of 1984, national revenues were divvied up and doled out to counties as block grants based on population size. As a result, private providers could no longer directly bill the national healthcare system for medical services rendered. This is very similar to how physicians who treat Medicare enrollees operate today. From 1984 to 1985 the count of practicing physicians went from well over 5,000 to just over 2,000 greatly controlling costs. Block grants also declined the percentage of GDP in Sweden spent on health expenditures. Sweden is one of the few countries that have been able to lower the percentage of health expenditures.

Additionally, as the economy worsened in the early 1990’s, the Swedish government froze taxes from 1991 until 1994. During this time 22% of the country’s beds for acute bed care were eliminated. Also self referrals received a higher copayment. This is very different in the U.S. where economic downturns cause private insurance enrollment decreases due to cost containments that occur in the private sector. However, since all health care cost controls are not vested in local state government, public spending and public health expenditures balloon during such times. For example, Medicaid spending increased by one third from 2000 to 2003 during the U.S. economic down turn. It grew by 10% between 2010 and 2011 representing 25% of all expenditures for states. U.S. healthcare reform efforts plan to reduce Medicare and Medicaid by 500 billion respectively which is likely to get caught up in the same political stalemate as the Medicare “doc-fix” since these decisions have not been decentralized and delegated to local governments. Since Sweden represents close to 80% of all health expenditures compared to less than 50% in the U.S., they are more sensitive to cost containment measures which lead to quicker reaction and better results.

The Federal government in the U.S. has continued to push off a fix to Medicare reimbursement reductions due to lobbying from physicians and trade groups. If these decisions were made at a local level to handle local concerns, States would have the ability to better control costs. Additionally, 50% of the Medicaid spend is handled by the states. This allows the states conversely to only handle 50% of the costs.

Lesson Learned: Medicare and Medicaid should be handled purely at the state levels since many states have balance budget amendments, cannot run deficits, and it is very costly for states to borrow funds.

Lastly, in 2002, Sweden introduced reference pricing and generic substitution for pharmacy coverage. This meant that when a drug was purchased, the health system would pick up 110% of the lowest priced drug. If a brand name drug was requested over a generic, the consumer would be responsible for the difference. From 2002 through 2005 Sweden realized $7 billion in savings which was close to 10% of total drug spend.

Lesson Learned:Adopt reference pricing and generic substitution in both Medicare and Medicaid programs across the U.S. to sharply cut pharmacy growth rates.

Physician & Hospital Controls

The United States is quickly facing a physician shortage when 20 million or more Americans will enter the insurance market in 2014 through Health Benefit Exchanges. In 1993 Sweden passed a law called The Point of Service Primary Care Reform which answered concerns of primary care shortages. The law made counties responsible for making sure every Swede had access to primary care. Additionally, it capped the amount of specialty training that occurred outside general medicine. It set ceilings and floors for the amount of patients treated by a single practice (1-3k patients per year). It provided credits and loan forgiveness to primary care doctors who started a new practice. And finally, the law allowed pay for performance measures that reduced the reimbursement to physicians who underperformed. Such controls including other initiatives has led to the use of electronic medical records for 94% of Swedish primary care physicians as compared to only 45% in the U.S. Additionally, 49% of Swedish physician practices have the capacity for advanced electronic health information compared to only 26% in the U.S. Lastly, 54% of Swedish practices will see patients after hours as compared to 29% in the U.S.

Lesson Learned: Strong controls on physicians at the local government level can greatly eliminate the potential of primary care shortages and improve the quality of care.

Conclusion

There are feasible lessons to be learned from recent healthcare reforms in Sweden particularly in the areas of decentralization, cost containment, and physician controls. In particular there are four lessons to be learned that are viable in the U.S. despite the current political climate and threat of the unconstitutionality of the Patient Protection and Affordable Care Act. Lesson 1: decentralize the burden of the uninsured to the individual states. Lesson 2: Allow individual states to budget for health care through block grants. Lesson 3: adopt reference pricing and generic alternative scripting. Lesson 4: place strong controls on physicians to eliminate shortages and increase access to care.

Despite America’s strong dislike for government run healthcare, roughly 40% of the population (125M Americans) is enrolled in a federally facilitated health program. Specifically there are 44M Medicare recipients, 62M Medicaid recipients, 10M Tricare recipients (health insurance for the U.S. military) , and 8M Federal Employee Health Benefit recipients. Sweden has been able to use free market principles within a government run system to manage care and cost. And yes, with any balance between quantity and quality, rationing of care does exist. But in a free market, when does rationing based on supply and demand not exist outside of anomalies like luxury and inferior goods?

A comprehensive analysis of Medicare claims data demonstrates that Medicare payments more than double when the beneficiary’s care contains at least one hospital visit. A report by the Alliance for Home Health Quality and Innovation examined the effects of hospital admissions and readmissions on Medicare expenditures.

Hospital readmissions play a key role in the amount Medicare spends per patient per episode. The research aims to more fully explain how hospital readmissions affect the Medicare episode payment and to provide guidance on the Medicare home health benefit. The data will provide information on to lawmakers as they look to revamp the Medicare fee-for-service payment system and eliminate unnecessary spending on avoidable hospitalizations.

In post-acute care episodes, patients whose episodes contained at least one readmission cost Medicare twice as much – roughly $33,000 compared to $15,000. When the number of chronic conditions per patient increases, so does the average number of readmissions, suggesting that a more complex patient is more likely to be readmitted. Services such as home health may be able to reduce the number of unplanned readmissions for some clinically appropriate patients by caring for them in home health and improving coordination and continuity of care.

There are interesting trends when an episode contains an admission. With regard to chronic conditions, the severity of the primary chronic condition, rather than the number of conditions, plays a more significant role in the impact on Medicare payment for the episode. For example, an episode with a primary chronic condition of diabetes and a prior admission generates a Medicare episode payment nearly three times that of a diabetes episode without a prior admission. This suggest that better management of low-severity chronic conditions (as well as high-severity conditions), which can be provided by home health care, may limit prior admissions for pre-acute episodes or even prevent some hospital admissions and subsequent post-acute care. As the severity of a chronic condition increases, so does the proportion of episodes in non post-acute care episodes. However, when patient with low-severity chronic conditions require a hospital admission, the payment per episode nearly quadruples since the cost of caring for these patients is relatively low without the readmission.

The data suggest that better management of chronic disease through home health intervention could enable more patients to remain out of the hospital following an initial admission. With clinically appropriate and effective care, patients have the potential to avoid some unnecessary admissions altogether, ultimately saving Medicare and taxpayers a significant amount. Home health care combines the right mix of care management, prevention training, and close observation to significantly reduce hospital admissions.

A program conducted in upstate New York generated some positive results. See below:

A group of hospitals in upstate New York have been able to cut inpatient readmissions by 25 percent as the result of a home visit program, reported the Rochester Democrat and Chronicle.

The collaboration between Rochester General Hospital and three other area facilities not only cut readmissions over 30 days but also cut down readmissions over a 60-day period, the article noted.

Reduction of readmissions is critical particularly for hospitals as the Centers for Medicare & Medicaid Services intends to cut payments for excess numbers of patients readmitted within 30 days of discharge for congestive heart failure, heart attacks and pneumonia. According to research, up to 75 percent of hospital readmissions may be avoidable, Consumer Reports magazine noted. Specific cost savings from the initiative were not immediately disclosed but could be as much as $100 saved for every dollar invested. “The cost of the intervention is measured in hundreds of dollars,” said Martin Lustick, corporate medical director for Excellus BlueCross Blue Shield. “The cost of a readmission is upward of $10,000.”

The program, known as Care Transitions Intervention, was conducted in coordination with the hospitals, local home health agencies, Excellus and the Monroe Plan for Medical Care, a Medicaid managed care program, according to the article. State and federal grants will allow the initiative to expand.

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public Service of New York University. He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.

With health care reform requiring close scrutiny of financial performance, hospital and health systems are closely examining ways to reduce spending. Following is one person’s thoughts about how fiscal responsibility can be achieved:

1. Mergers and Consolidations

Mergers and acquisitions in the health care sector are at an all-time high in terms of dollar value. Hospitals and physicians are no doubt integrating and other providers are combining and coordinating care delivery models in response to the current and expected changes resulting from health care reform. There are experiments in reimbursement and payment methodologies that should lead to fiscal sanity but can also lead to a concentration among providers. Some believe that this will lead to less expensive care while others argue that it will lead to monopoly and its attendant effects on the health care financial landscape. What do you think?

2. Reduced Readmissions

Tied to reimbursements, readmission rates are the target of hospitals to reduce the number of patients for the same condition. Previous studies have found that a number of things can help reduce readmissions, such as home health use after hospitalization, patient engagement and education, use of nurses for patient follow-up, and remote health monitoring. Hospitals should be focused on reducing readmissions and unnecessary admissions for conditions that probably would not have led to an admission if the person had gotten proper primary care. Will accountable care organizations help in this regard?

3. Comparative Effectiveness Research

As leading institutions continue to look at evidence-based medicine and patient outcomes, new research is being developed about what is most effective. A most hopeful trend is occurring in health systems where they are really looking in detail at examining what doctors actually do and what the results are in terms of outcomes and then feeding it back into the system. Look into Geisinger and Kaiser Permanente as leaders in this practice. but, will this be widely accepted by physicians as their medical decisions and care are more frequently scrutinized?

4. Care Coordination

With initiatives already in motion for accountable care organizations and patient-centered medical homes, more attention will focus on outcomes from care coordination and managing the entire care spectrum of the patient. There is a trend to reimbursing health care providers based on outcomes instead of paying for more care. Will the government (read Medicare and Medicaid) focus on this paradigm of paying providers or will extraordinary pressure be exerted by various advocacy organizations to maintain fee for service reimbursement?

5. Collaborative Communication

With increasing requirements for compliance, hospitals and providers will need to collaborate in their communication efforts. New ways to work together will evolve resulting in more lines of communication. Hopefully, the expansion of health information technology will lead to virtual connections between providers. But at what cost and in what time frame?

And so it goes. Payors are aligning with providers either through acquisitions or other creative forms of working together. With increased emphasis on outcomes-based medicine, companies that provide care coordination oversight and patient care management will assume more importance in the health care cycle. Was Humana prescient in its acquisition of SeniorBridge Family of Companies with the strategy of positioning them to favorably respond to the changing health care environment? Will others follow? Stay tuned.

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public service of New York University. He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.

The Patient Protection and Accountable Care Act (PPACA) has unleashed a flurry of activity by health care providers and executives in response to some of its provisions. While the PPACA primarily addresses the issue of access to health care services by patients, it also touches on the areas of cost-cutting, reimbursement and improvement in quality of care. This article will refer to some strategies for hospitals to consider in adapting to the changing health care climate. Future articles will indicate five cost-cutting health care trends to watch and will provide a list of recommendations for savings developed by health care executives that were submitted to the now-failed “Super-Duper Congressional Deficit Reduction Committee”.

Hospitals and health systems are developing and implementing strategies to adapt to the dynamic health care environment. The American Hospital Association Committee on Performance Improvement recently issued a report on priority strategies for hospitals and health systems of the future, which included responses from health care executives, which should be undertaken in the coming decade. The top four are:

Aligning hospitals, physicians, and other providers across the care continuum: Described as a shifting paradigm from “competition to interdependency”, according to the report, aligning providers across the care continuum is essential to true partnerships and care coordination. This can include shared savings incentives and sharing of data. Wenatchee (Wash.) Valley Medical Center held meetings with all providers and acted on their suggestions.

Utilizing evidence-based practices to improve quality and patient safety: Quality is directly tied to reimbursement, especially as hospitals with high readmission rates will be penalized starting in 2013. Hospitals need to improve outcomes and should employ multi-disciplinary teams to review cases that failed with the goal of modifying processes accordingly. Flowers Hospital in Alabama was able to achieve a more than 99% compliance rate with CMS core measures, tied to its financial reimbursements.

Improving efficiency through productivity and financial management: Hospital executives are looking for ways to cut redundant efforts and standardize processed to cut costs and improve patient care. North Mississippi Medical Center sought to improve patient satisfaction in the ED around wait times by implementing bedside triage, allowing for X-ray viewing abilities in each patient room, and installing a computerized tracking system to increase patient flow

Developing integrated information systems: While health IT is critical to connecting providers with information in real time, in addition to owning the technology, hospitals and health systems must perform sophisticated data mining and analysis for continuous improvement in patient care and for the organization. Piedmont Clinic in Atlanta, using several sources of electronic data, created a single data warehouse with information on patient satisfaction, core measures, physician quality reporting, population health statistics, and billing. In addition, Piedmont provided daily updates about the critical data.

Change is inevitable and will occur. What will vary is each organization’s journey to develop responses to these changes.

In next month’s column, I will suggest five cost-cutting health care trends to watch and, perhaps, what cost-cutting measures health care leaders suggested to the now-defunct Congressional Deficit Reduction Committee.

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public service of New York University. He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.

Fortunately, cutting healthcare costs is hardly a partisan issue. Especially during this time of economic downturn, policymakers and taxpayers alike are looking to cut costs anywhere they can. Regardless, where and by how much these expenses should be cut remains a major point of contention among policymakers across the political spectrum. Given the increasingly high costs associated with the healthcare system, it is not surprising that government healthcare programs have become low-hanging fruit for budget cuts—less than two years after the enactment of costly healthcare reform legislation.

Following the passage of the Affordable Care Act (ACA) of 2010, the Department of Health and Human Services reported that the bill would increase total national health expenditures by more than $200 billion from 2010-2019. In a statement by the Congressional Budge Office (CBO) in May 2010, they stated: Rising health costs will put tremendous pressure on the federal budget during the next few decades and beyond. In CBO’s judgment, the health legislation enacted earlier this year does not substantially diminish that pressure.

ACA’s prospects of cutting costs may appear grim. In 2010 alone the United States spent$2.6 trillion on healthcare – over $8,000 per American. For more than 30 years now, healthcare costs have been growing at a rate 2% greater than the general economy. As an additional portion of the U.S. population gains insurance through expanded government healthcare programs, can we actually afford this new legislation?

A simple answer to this question is derived from basic financial principles: in order to achieve a return on an investment, one must actually make an investment. Nevertheless, the stakes are high and the nuances lie in how to not only achieve a return, but the greatest return from our $200 billion/year investment in the healthcare system.

To achieve the greatest return, we cannot only focus on reducing costs – we must strive to also improve quality. Ranked by the World Health Organization as the highest in costs but 37th in overall performance, the U.S. healthcare system is evidently experiencing a ‘value-deficit,’ which is truly at the crux of our nation’s healthcare problems.

One of the strongest themes pervasive throughout ACA is the generation of more information. More information on the top hospitals and the best doctors. More information on the medications that are most effective for treating certain conditions and patient populations. More information on how health plans’ benefit packages compare to others. According to basic market principles, additional and more accessible information will drive competition, which in turn, will force the suppliers of healthcare services to lower their costs and improve quality.

Regardless, in order to achieve greater competition, healthcare consumers must also change their behavior. They need to better understand their purchasing decisions. It’s ironic that with a commodity as priceless as good health, so many patients passively accept or deny treatments and services provided based on limited information. Patients must have the gumption to research their condition and choose providers or medication based on unbiased and comprehensible information.

Nevertheless, due to the nature of healthcare insurance, few patients are cognizant of healthcare costs. To alleviate this moral hazard, the financial burden must be extended to either the patient or the provider. ACA focuses primarily on the provider through carrot and stick approaches, such as pay-for-performance (P4P) programs, which reward physicians for providing the best care. Further, P4P penalizes physicians for over- providing care, thus making them more accountable for costs associated with the care they deliver.

To alleviate moral hazard on the patient side is more complicated and risky. Healthcare consumers are often more price elastic than one would predict, given that they currently lack the information and training to predict the consequences of foregoing certain preventive measures and early interventions. Nevertheless, applying co-payments on certain procedures and not others (such as mammograms) may encourage patients to be more wary of the amount and type of healthcare they consume.

Ultimately, the simplest equation for alleviating the value-deficit is this: costs divided by quality. Although this is undoubtedly more difficult to achieve than simple division, this basic equation should be the basis for solving the problems of our healthcare system.

Elaine Purcell is a second year graduate student in Wagner’s Health Policy and Management Program focusing on Healthcare Management and Administration. Prior to Wagner, she worked in Washington, DC analyzing healthcare policy during the passage of national healthcare reform.